Comerica Economic Weekly

Economic data this week showed a good finish for the recently completed second quarter, and a good start to the current third quarter.

Housing starts increased in June by 8.3 percent, to a 1.215 million unit annual rate. The volatile multifamily component bounced back, gaining 13.3 percent for the month and hitting a 0.366 million unit rate. Single-family starts increased by 6.3 percent in June, to a 0.849 million unit rate. Building permits were also stronger in June, up by 7.4 percent to a 1.254 million unit rate. Multifamily permits were up 13.9 percent, to a 0.443 million unit rate. Single-family permits gained 4.1 percent, to hit a 0.811 million unit annual rate.

Builder confidence eased in early July according to the National Association of Homebuilders. Builders are increasingly concerned about rising material prices.

Mortgage applications increased in mid-July after falling in early July. The 12-week moving average for total apps remains on a moderate upward trend. According to the Mortgage Bankers Association, the rate for a 30-year fixed rate mortgage was stable at 4.22 percent for the week ending July 14.

The Conference Board’s Leading Economic Index increased by 0.6 percent in June, its 10th consecutive monthly increase, and the strongest monthly gain since January. Both the Coincident Index and the Lagging Index were up by 0.2 percent for the month. The solid increase across all three indexes for the month of June is a positive signal for the U.S. economy, reinforcing our expectations for moderate GDP growth through the second half of this year.

Initial claims for unemployment insurance decreased by 15,000 for the week ending July 15, to hit 233,000, a very low number. There may be some residual seasonality imbedded in the midsummer numbers due to the annual auto plant summer closures. Continuing claims increased by 28,000 for the week ending July 8, to hit 1,977,000, another very low number.

The Federal Reserve Bank of Philadelphia’s Manufacturing Business Outlook Survey’s current conditions index dipped to a still-positive 19.5, suggesting that manufacturing conditions in the mid-Atlantic area are still improving, but at a slower pace than last month. The New York Fed’s Empire State Manufacturing Survey’s current condition index also eased, to a still-positive 9.8.

We expect the Federal Reserve to leave the fed funds rate range unchanged at 1.00-1.25 percent at the conclusion of the upcoming Federal Open Market Committee meeting over July 25/26. They will likely reinforce expectations that the schedule for the beginning of balance sheet reduction will be announced at the conclusion of the September 19/20 FOMC meeting.

Market expectations for future interest rate hikes over 2018 have cooled a bit with weaker inflation readings. We look for the Fed to leave 2018 interest rate expectations unchanged next week, instead opting for maximum maneuvering room later this year. They are caught between lower than expected inflation now and the potential for more inflation later as the U.S. economy begins to run above the potential GDP trend line for the first time in this expansion cycle.

The European Central Bank issued a policy announcement that implied that they are considering how and when to end their asset purchase program. The ECB left their benchmark interest rates unchanged.